Supreme Court Sharply Limits Punitive Damages

In a classic example of a bad case making bad law, the U.S. Supreme Court held that the Due Process Clause of the 14th Amendment sharply limits both the circumstances in which punitive damages may be awarded and the amount of such damages. State Farm Mutual Automobile Insurance Co. v. Campbell, 2003 WL 1791206 (Apr. 7, 2003).

The case was initiated by an insured, Campbell, against State Farm, his insurer. Campbell claimed that in refusing to settle the claim of a third party against Campbell, State Farm was guilty of bad faith, fraud and intentional infliction of emotional harm. Campbell was distressed because he had been found liable to the third party for $186,000, far more than his $50,000 policy limit, after State Farm had refused an offer to settle for $50,000. After originally refusing either to pay the extra $136,000 or to assist Campbell in his unsuccessful appeal from the award, State Farm had relented and paid the entire judgment.

Campbell nonetheless sued State Farm arguing, among other things, that State Farm's conduct toward him was part of a nationwide scheme, orchestrated from the highest levels of corporate management. He was awarded $1 million in compensatory damages and $145 million in punitive damages. Unfortunately for Campbell, the Supreme Court has now reversed the punitive damage award.

Among other things, the Court determined that conduct outside of the forum state, i.e., similar reprehensible conduct in other states, can not be used in determining liability for, or the amount of punitive damages, unless the outstate conduct has a nexus to the specific harm to the plaintiff. Further, a state cannot impose punitive damages based on evidence of conduct in another state which is lawful in that other state.

In addition, the Court states that punitive damages in almost all circumstances cannot exceed nine times the compensatory damages and possibly less when the compensatory damages are substantial. In a somewhat unfamiliar division of views, Justice Kennedy wrote for the majority, joined by Breyer, O'Connor, Rehnquist, Stevens, and Souter. Dissenting opinions were filed by Ginsburg, Scalia and Thomas.